New Normal in Emerging Deal Terms & Structures


The unprecedented disruption to the credit and deal markets due to COVID-19 will have deep and lasting impacts on how we structure M&A deals for the foreseeable future. On our June 18th webinar, Bharat Ramprasad of Stifel moderated a panel including Sean Coleman of FS Investments, David Denious of Faegre Drinker, Matt Moran of Inverness Graham and Dan Ryan of MidOcean Partners.  Here are the key takeaways:

Real-time reports on opportunities and challenges during the pandemic

  • With many middle market businesses less resilient than their larger peers, the deal funnel has contracted significantly. Sponsors need to be opportunistic and lean in on diligence to understand the impact COVID-19 will have on customers and suppliers. Traditional M&A playbooks need to be supplemented with more creative methods for identifying and assessing risk. 
  • The “typical” process is no more – many sponsors are ready and waiting, but expect frequent process changes as the new normal.   
  • While new platforms may be challenging, strategic M&A for portfolio companies remains the focus.
  • Pent-up sponsor demand will favor resilient business models and high performers, making it a great time to bring these assets to market.   
  • Real time decision making by investment committees and boards makes assessing real interest from buyer pools challenging prior to launch. Uncertainty drives “deal paralysis”.     
  • Creative structures (e.g., PIPES, convertible preferred debt, etc.) may gain favor and differentiate investors.

New normal in deal terms and structure

  • Lenders are asking for more, driving up the cost of debt and emphasizing the need for thorough diligence.
    Buyer Seller Expectations on Value
    Much more work is going into arranging financings with ‘puts and takes’ required throughout. 
  • Earnouts may be gaining favor, as many sellers are not ready to bridge the valuation gap or to trade price for certainty to close. 
  • Recent precedents using “normal course” covenants as a tool to void purchase agreements may lead to more attention on these clauses going forward, and sellers may seek carve-outs to the covenant on future deals.
  • Working capital considerations are top of mind and increasingly complex as operating models have strayed from historical trends.

New normal for diligence getting deals done

  • Now, more than ever, buyers need to right industry knowledge and operating talent before deploying
    Tech Virtual Diligence
  • Increasing use of technology in diligence – everything from video conferencing to using drones to conduct site visits. 
  • Lack of face-to-face interaction is an impediment to growing trust with sellers and their management teams, creating another challenge in getting to signing, and adding time to the process.